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SEC Cracks the Floodgates to New Hedge Fund Investors

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You may already be an “accredited investor,” with more than $1 million in net assets (excluding your home) or $200,000 in annual income. If so, you’ve long had the ability to invest in hedge funds, where you get the privilege of paying the managers 20% of your profits and 2% of your assets.

But now, the SEC is allowing many more Americans to play at the hedge fund casino. Paul Kiernan reports in The Wall Street Journal:

The Securities and Exchange Commission deemed more investors capable of navigating the opaque world of leveraged buyouts, hedge funds and startups, a decision likely to fuel further growth in loosely regulated private markets.

Commissioners voted 3-2 on Wednesday to approve a proposal expanding its definition of so-called accredited investors to include holders of an entry-level stockbroker’s license, “knowledgeable employees” of nonpublic firms and others. It also opened the door to further broadening the category to holders of other credentials.

Until now, investors could be considered accredited if they had $1 million in net assets, not counting their primary residence, or at least $200,000 in annual income.

The thresholds aren’t indexed for inflation, so the ranks of people who meet them will likely continue to grow.

The SEC didn’t provide an estimate of the number of people who would qualify under the new rule, but its decision to designate certain credentials as a measure of financial literacy is likely to prompt other groups—from chartered financial analysts to holders of law degrees and MBAs—to seek accredited-investor status.

“Now that they’ve opened this door, there’s going to be a lot of trucks trying to drive through,” said Tyler Gellasch, executive director of Healthy Markets, an investor group focused on market structure. “It’s really hard for them to credibly distinguish one qualification from another.”

There’s nothing wrong with Americans having more freedom to do what they want with their money. But with hedge funds, often you invest, and they win.

Not all hedge funds are winners. In fact, hedge funds can be a cyclical asset. Just back in 2017, investors were evacuating big hedge funds in a panic.

And what if you want to invest in a “premier” hedge fund? It will cost you even more than the traditional 2-and-20. Even when you’re paying that extra money, they can blow the big calls.

Action Line: Protect your investments by focusing on dividends, compound interest, and most important, by being patient. Avoid risk where possible.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com